Vignette 1.3 - Who Was the Richest Person Ever?
Vignette 1.4 - How Unequal Was the Roman Empire?
Vignette 1.5 - Was Socialism Egalitarian?
Vignette 1.6 - In What Parisian Arrondissement Should You Live in the ...
Vignette 1.7 - Who Gains from Fiscal Redistribution?
Vignette 1.8 - Can Several Countries Exist in One?
Vignette 1.9 - Will China Survive in 2048?
Vignette 1.10 - Two Students of Inequality: Vilfredo Pareto and Simon Kuznets
CHAPTER 2
Vignette 2.1 - Why Was Marx Led Astray?
Vignette 2.2 - How Unequal Is Today’s World?
Vignette 2.3 - How Much of Your Income Is Determined at Birth?
Vignette 2.4 - Should the Whole World Be Composed of Gated Communities?
Vignette 2.5 - Who Are the Harraga?
Vignette 2.6 - The Three Generations of Obamas
Vignette 2.7 - Did the World Become More Unequal During Deglobalization?

…

As for income distribution within nations, Pareto failed to define a theory of change in it, although “failure” is not a wholly appropriate term simply because Pareto thought, and believed to have empirically proved, that income distribution must be more or less fixed and thus that there were no laws of its “change” with development. There was, Pareto argued, only a “law of its fixity.”
It wasn’t until 1955 that Simon Kuznets, a Russian-American economist and statistician, proposed the first real theory of what propels change in income distribution. (He is profiled, together with Pareto, in Vignette 1.10.) He argued—having had access to not many more data points than Pareto (although the data were of a different kind, household, not fiscal, surveys)—that inequality among people is not the same regardless of the type of society but varies predictably as society develops.

…

The problem with surveys, though, is that, for most developed countries, the first available surveys start only after World War II. There are some earlier and incomplete surveys from nineteenth-century England and the early-twentieth-century United States and Soviet Russia, but we can hardly speak of anything serious and usable before approximately the early 1950s. (You may recall that Pareto’s speculations were based on fiscal data, whereas Simon Kuznets had hardly a dozen surveys to draw upon—even as late as 1955.)
For developing countries the situation is even worse; very often there is nothing before the 1970s or even the 1980s. This is particularly true for African nations, where household surveys developed, often with the assistance of international organizations, only in the 1980s.23 What about the two most populous countries in the world?

Source: various histories of the Great Depression, including The Econ Review (www.econreview.com).
“Unemployment soared to 25% in the UK”
Source: Stephen Constantine, Unemployment in Britain Between the Wars (London: Longman, 1980).
“30% unemployed in Australia”
Source: Australian government figures.
Simon Kuznets
Read more about the rise of economics and the life of Simon Kuznets in Robert Fogel, Simon S Kuznets April 30, 1901–July 9, 1985 (Cambridge, MA: NBER, 2000); and Simon Kuznets et al., National Income, 1929-32 (NBER, June 1934).
“As recently as the late 19th century, economics was considered of such little importance that at Oxford University, for example, there was only one part-time lecturer, and at American universities it was merely one section of one segment of an entire course”
Sources: Robert Fogel, Simon S Kuznets April 30, 1901–July 9, 1985 (Cambridge, MA: NBER, 2000); and Gerard M Koot, English Historical Economics, 1870-1926 : The Rise of Economic History and Neomercantilism (Cambridge: Cambridge University Press, 1987).

…

It was like asking a general to deploy his troops without knowing the lay of the land or where the enemy was, or where reinforcements were needed, and how many. How could any leader make plans when he could not see the whole picture?
So the US senate commissioned a private enterprise called the National Bureau of Economic Research (NBER), which had been collecting records for some time, to create a set of national income accounts. The lead researcher on the project was a man by the name of Simon Kuznets.
Born in Pinsk in what was then Russia in 1901, Kuznets had briefly served as a statistician in Odessa in the Ukraine. He had arrived in the US in 1922. He had distinguished himself, so far, only at Columbia University. He was about to create his magnum opus.
It is hard for us to imagine economics as anything other than what it is today – a central consideration of our lives. But as recently as the late 19th century, economics was considered of such little importance that at Oxford University, for example, there was only one part-time lecturer, and at American universities it was merely one section of one segment of an entire course – moral philosophy, which was then only taught by ordained ministers.

…

Is Experientialism the Answer to Stuffocation?
Ron Inglehart
Again, Ron Inglehart, “The Silent Revolution in Europe: Intergenerational Change in Post-Industrial Societies”, American Political Science Review Vol. 65, No. 4, December 1971. To see the shift away from materialistic values, see the World Values Survey (www.worldvaluessurvey.org).
The changing make-up of our economy
Compare the type of items in Simon Kuznets, National Income, 1929-32 (Cambridge, MA: NBER, June 1934) with those in today’s economies. Consider also, Francisco J Buera and Joseph P Kaboski. “The Rise of the Service Economy”, American Economic Review Vol. 102, No. 6, 2012. For an easy introduction, see the video infographic “The iPhone Economy” at www.nytimes.com.
For the definitive text on consuming fewer materials, read Chris Goodall, “Peak Stuff”, Carbon Commentary, 2011.

It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything, in short, except that which makes life worthwhile.
Like many before and after him—including the GNP’s creator, Simon Kuznets—Senator Robert Kennedy believed there was something profoundly wrong with the way we calculate our national wealth and with the numbers we produce to do so, such as the GNP and the Gross Domestic Product (GDP). As Kennedy pointed out, these numbers generate alarming anomalies: in their parlance cigarette advertising is worth more than the health of a child. And yet today, forty years after Kennedy’s call for their revision, these numbers continue to rule the policy decisions of governments, financial institutions, corporations and communities.

…

With the crash of the New York Stock Exchange in October 1929 the laissez-faire principles that had guided government approaches to national economic affairs in the nineteenth century suddenly lost their lustre. Over the next four years in the United States, 11,000 banks failed, production collapsed by more than a half and unemployment soared, peaking at 13 million or nearly one-quarter of the workforce. At sea in their attempts to develop a coherent response to the crisis, the administrations of Herbert Hoover and then Franklin Delano Roosevelt commissioned Russian-born economist Simon Kuznets to develop comprehensive estimates of the income of the United States to guide their policies. In March 1933, Roosevelt succeeded Hoover as US president and immediately implemented his ‘Hundred Days’: ‘a presidential barrage of ideas and programmes unlike anything known to American history’. The following year, in May 1934, the British economist John Maynard Keynes went to America to see the New Deal in action.

…

And they were mere guesses: there was no systematic collection of information on national production by governments or any other institution. It was not until the depression of the 1930s that the idea of looking at a national economy in terms of accounting became widespread and the first attempts were made to calculate not just a nation’s income but also its expenditure. The first official measure of the overall US economy—measures of national savings, consumption and investment—was devised by Simon Kuznets and his colleagues in the 1930s to provide policymakers with a comprehensive picture of what was going on. No comprehensive measures of national income and output had existed before then. It was the Depression that raised the need for national accounts such as the Gross Domestic Product (GDP)—or, as economist William D. Nordhaus said in 2010: ‘If you want to know why GDP matters, you can just put yourself back in the 1930s period, where we had no idea what was happening to our economy.’

It was obvious that the homeless population was growing and that companies were going bankrupt left and right, but as to the actual extent of the problem, nobody knew.
A few months earlier, President Hoover had dispatched a number of Commerce Department employees around the country to report on the situation. They returned with mainly anecdotal evidence that aligned with Hoover’s own belief that economic recovery was just around the bend. Congress wasn’t reassured, however. In 1932, it appointed a brilliant young Russian professor by the name of Simon Kuznets to answer a simple question: How much stuff can we make?
Over the next few years, Kuznets laid the foundations of what would later become the GDP. His initial calculations caused a flurry of excitement and the report he presented to Congress became a national bestseller (itself adding to the GDP, one 20-cent copy at a time). Soon, you couldn’t switch on the radio without hearing about “national income” this or “the economy” that.

…

“The GDP and related data are like beacons that help policymakers steer the economy toward the key economic objectives.”21
At the start of the 20th century the U.S. government employed a grand total of one economist; more accurately, an “economic ornithologist,” whose job was to study birds. Less than 40 years later, the National Bureau of Economic Research payrolled some 5,000 economists, in the sense that we use the word. These included Simon Kuznets and Milton Friedman, ultimately two of the century’s most important thinkers.22 All across the world, economists began to play a dominant role in politics. Most were educated in the United States, the cradle of the GDP, where practitioners pursued a new, scientific brand of economics revolving around models, equations, and numbers. Lots and lots of numbers.
This was a completely different form of economics to what John Maynard Keynes and Friedrich Hayek had learned at school.

Clark was appointed in 1930 to provide statistics to the newly created National Economic Advisory Council, the first body ever created by the British government to provide formal economic advice. The experience of the Depression created this demand for statistics that might help the government figure out how to bring to an end the unprecedented economic slump.
Across the Atlantic, in the United States, Simon Kuznets had a similar motivation. The government of Franklin Delano Roosevelt wanted a clearer picture of the state of an economy trapped in a seemingly endless depression. The National Bureau of Economic Research was requested to provide estimates of national income. Kuznets, who later won the Nobel Memorial Prize in Economic Science for this work, took on the task of developing Clark’s methods and applying them to the U.S. economy.

…

In a book published in 1996 I noted the phenomenon that growth in GDP for more than a decade had literally not weighed anything: all the incremental value-added growth was in intangibles of one kind or another.15 A measure of the national economy designed for tangible, physical products only is not really a good measure of an increasingly weightless economy.
The lesson to draw from this discussion is that GDP is not, and was never intended to be, a measure of welfare. It measures production. As we saw in chapter 1, Simon Kuznets, one of the pioneers of national accounting, was keen to develop a measure of economic welfare. But the demands of wartime meant his ambition was overtaken by the need to measure production and productive capacity, in order to use scarce material resources and labor as efficiently as possible. If the aim instead is to develop a measure of national economic welfare, we shouldn’t be starting with GDP.

…

“Economists all know that, and yet their everyday use of GNP as the standard measure of economic performance apparently conveys the impression that they are evangelistic worshippers of GNP,” remark William Nordhaus and James Tobin.33
Besides, whether or not the task ought to be measuring welfare rather than GDP was debated in the early years of GDP’s development, as we saw in chapter 1, and it has been debated ever since. Simon Kuznets, working on measuring national income in the 1930s, wrote:
It would be of great value to have national income estimates that would remove from the total the elements which, from the standpoint of a more enlightened social philosophy than that of an acquisitive society represent dis-service rather than service. Such estimates would subtract from the present national income totals all expenses on armament, most of the outlays on advertising, a great many of the expenses involved in financial and speculative activities, and what is perhaps most important, the outlays that have been made necessary in order to overcome difficulties that are, properly speaking, costs implicit in our economic civilization.

Upon retiring from NYU in 1945, King became chairman of the Committee for Constitutional Government, an anti–New Deal organization originally founded to oppose Roosevelt’s 1937 court-packing scheme, which outraged King.
Well before he died in 1962 at age eighty-two, King saw his legacy eclipsed by the work of a Russian émigré who in 1927 had succeeded King at the NBER and in 1971 would win the Nobel Prize in economics. His name was Simon Kuznets, and among his many lasting contributions to economics was the creation of the analytic foundation for the study of income inequality. Kuznets had (and continues to have) legions of admirers in the economics profession. King was not one of them. In a 1940 letter to one of the NBER’s directors, King quarreled with what he termed Kuznets’s “assumption … that environment and luck are the principal determinants of a persons [sic] success or failure in life.”

…

Sampling is very useful when you’re measuring extremely large populations; that’s why demographers are forever recommending that the Census Bureau’s much better-known project, the decennial census, quit trying to count every last American—a method that’s bound to miss some hard-to-find people—and instead conduct a scientifically rigorous sampling, which would be more accurate. But sampling becomes a lot less accurate when you’re measuring trends within a very small subgroup of the larger population. And the proportion of households with annual incomes above $1 million is well under 1 percent.1
Rather than rely on the Current Population Survey for broad-brush data about the rich, Piketty and Saez did what Simon Kuznets had done prior to his groundbreaking 1954 analysis of U.S. income distribution. They looked at data from the Internal Revenue Service. Except perhaps for a very few criminals who possess a superhuman ability to hide enormous quantities of cash, everyone in the United States who makes $1 million or more files a yearly tax return, and the IRS keeps track of precisely how much each of these people rakes in.

…

Very civilized men can all become equal because they all have at their disposal similar means of attaining comfort and happiness. Between these two extremes is found inequality of condition, wealth, knowledge—the power of the few, the poverty, ignorance and weakness of all the rest.”
16. In fairness to Kuznets, he himself characterized his income-inequality theory as “5 percent empirical information and 95 percent speculation, some of it possibly tainted by wishful thinking.”
17. Simon Kuznets, “Economic Growth and Income Inequality,” American Economic Review 45, no. 1 (Mar. 1955), 1–28.
18. Steven R. Weisman, The Great Tax Wars (New York: Simon & Schuster, 2002), 353.
19. Claudia Goldin and Robert Margo, “The Great Compression: The Wage Structure in the United States at Mid-Century,” Quarterly Journal of Economics 107, issue 1 (Feb. 1992), 1–34.
20. The factory workers were all in New York State.
21.

Vernon argues that government spending did not end the Depression, but rather, tight monetary and fiscal policies increased investor confidence.79 Historian Robert Higgs argues that the war should not be seen as raising the general standard of living, since 22 percent of the (male) labor force was mobilized into the military—many by conscription. Being drafted took away male workers’ freedom of choice, forcing them into low-paid employment as soldiers. They were replaced by teenagers, retired workers, women, and members of minority groups. This sent the overall unemployment rate to 1.4 percent, but, Higgs argued, resulted in less comfort and happiness overall.
Economist Simon Kuznets pointed out that during World War II, much was spent on war materiel and that war goods do not improve the well-being of Americans, but rather, in moments of existential crisis, make it possible for well-being to exist at all. Kuznets argued that many military products should not even be counted as part of the gross national product (GNP), and of course, to exclude military products from GNP would show a shrinking American productivity during wartime.

…

Murrow and show producer Fred Friendly gave little sense of what might concretely be done to improve the living conditions of the migrants or the educational prospects of their children, gesturing vaguely in the direction of farmworkers’ unions while at the same time acknowledging the extreme imbalance of power between the migrants and their farm employers.
Harvest of Shame was part of a larger discourse about hidden poverty and the costs of economic inequality that emerged in the late Eisenhower administration and then grew louder in the 1960s. In 1962, the historian Gabriel Kolko published Wealth and Power in America. The economist Simon Kuznets had claimed that income in the United States necessarily would become more evenly distributed over time. Kolko attacked Kuznets with a statistical analysis demonstrating that Americans in fact had a remarkable lack of upward mobility. Kolko pointed out that large numbers of Americans could not afford medical expenses nor even to replace their clothing. He argued that the flagship social support program, Social Security, had been originally underfunded with the “Victorian virtue of thrift” in mind; it was meant to provide a substandard lifestyle.

How are interest rates determined?
His list got longer but the questions never aimed higher, to encourage the students to consider the economy’s purpose. How had the GDP growth cuckoo so successfully hijacked the economic nest? The answer can be traced back to the mid 1930s – as economists were just settling upon a goalless definition of their discipline – when the US Congress first commissioned economist Simon Kuznets to devise a measure of America’s national income. The calculation he made came to be known as Gross National Product, and was based on the income generated worldwide by the nation’s residents. For the first time, thanks to Kuznets, it became possible to put a dollar value on America’s annual output and hence its income – and to compare it to the year before. That metric proved to be extremely useful, and it fell into welcoming hands.

…

What’s more, he argued, the steep ‘social pyramid’ that his data had repeatedly revealed must be a fixed fact of human nature, making attempts at redistribution counterproductive. The way to help the worst off was to expand the economy, he concluded, and the wealthy were best placed to make that happen.4
Converging, diverging, or ever-fixed? Debates over the likely path of income inequality raged on, but in 1955 the story took a crucial turn, quite literally. When Simon Kuznets – the brilliant inventor of national income accounting – gathered together long-run trend data on incomes in the US, UK and Germany, he was taken aback by what he found. In all three countries, income inequality measured before tax had been falling at least since the 1920s, and even possibly before the First World War. Contrary to Pareto’s static social pyramid, Kuznets believed he had uncovered a different law: a social rollercoaster ride on which income inequality first rose, then levelled out, and eventually fell again, all while the economy grew.

Only "effective demand"—a powerful new term introduced in chapter 3 of The General Theory—counts. What consumers and businesses spend determines national output. Keynes defined effective demand as aggregate output (Y), which is the sum of consumption (C) and investment (I). Hence,
Y= C +1
Today we refer to Y or "aggregate effective demand," as gross domestic product (GDP). GDP is defined as the value of final output of goods and services during the year. Simon Kuznets, a Keynesian statistician, developed national income accounting in the early 1940s as a way to measure Keynes's aggregate effective demand. Keynes effectively demonstrated 10. Foster and Catchings rejected all arguments and never paid the prize money.
that if savings are not invested by business, GDP does not reach its potential; recession or depression indicates a lack of effective demand.

…

Other free-market economists, such as Henry Hazlitt and Murray Rothbard, wrote largely from outside the profession and had marginal influence.
How did Friedman almost single-handedly change the intellectual climate back from the Keynesian model to the neoclassical model of Adam Smith? After acquiring academic credentials, he focused on scholarly technical work, particularly empirical evidence to test the Keynesian model. He learned the importance of sophisticated quantitative analysis from Simon Kuznets, Wesley Mitchell, and other stars at the National Bureau of Economic Research.
Friedman started teaching at Chicago in 1946, where he stayed until his official retirement in 1977. Following Frank Knight's retirement in 1955, Friedman continued the Chicago tradition and even strengthened it with an upgraded version of Irving Fisher's quantity theory of money, which he applied to monetary policy.

The earliest models equated economic output to the ratio between an economy’s capital and labor when the economy was in equilibrium. They also modeled economic growth as the tug-of-war between an economy’s savings rate (the capital that it keeps for later use) and capital depreciation (the wear and tear that erodes capital).
Robert Solow advanced the prototypical model of economic growth in the 1950s—a timely development, as the data needed to evaluate such models were just becoming available. Simon Kuznets, the Russian-born economist who fathered GDP, had finished creating the system of national accounts a couple of decades earlier, helping generate the economic metric that dominated the twentieth century.4 Solow’s model, however, did not measure up well when it was compared with empirical data. As Kuznets famously remarked in his Nobel Prize acceptance speech, “The earlier theory that underlies these measures defined the productive factors in a relatively narrow way, and left the rise in productivity as an unexplained gap, as a measure of our ignorance.”5
Kuznets’ “measure of our ignorance” is what we know technically as total factor productivity (TFP).

…

Kuznets originally generated the concept of gross national product (GNP), which was the official metric at the time. Gross domestic product (GDP) displaced GNP as the official metric in the 1990s. GDP considers the production of goods and services within a country. GNP considers the goods and services produced by the citizens of a country, whether or not those goods are produced within the boundaries of the country.
5. Simon Kuznets, “Modern Economic Growth: Findings and Reflections,” American Economic Review 63, no. 3 (1973): 247–258.
6. Technically, total factor productivity is the residual or error term of the statistical model. Also, economists often refer to total factor productivity as technology, although this is a semantic deformation that is orthogonal to the definition of technology used by anyone who has ever developed a technology.

The Encyclopedia of Life could have one expandable Web page per species, documenting all known aspects of the species: genomics, cladistics and evolution, behavior, range, abundance, ecological relations with other species, threats to survival, and so forth.
CHAPTER 7: GLOBAL POPULATION DYNAMICS
159 “There doesn’t seem ”: “How to Deal with a Falling Population” The Economist 284, no. 8539 (July 28, 2007): 11.
160 Simon Kuznets and Michael Kremer: Michael Kremer, “Population Growth and Technological Change: One Million B.C. to 1990,” The Quarterly Journal of Economics 108, no. 3 (August 1993): 681–716; Simon Kuznets, “Population Change and Aggregate Output,” Demographic and Economic Change in Developed Countries (Princeton, NJ: Princeton University Press, 1960): 324–40.
177 The standard tests have: Robert J. Barro and Xavier Sala-i-Martin, Economic Growth, 2nd edition (Cambridge, Mass.: MIT Press, 2004).
177 each country’s average annual growth rate: Initial income is expected to have a negative effect: richer countries should grow less rapidly, and poor countries more rapidly, because of the phenomenon of convergence.

…

THE DEBATE OVER POPULATION
Economists tend to be divided into three camps: population optimists, who say that today’s population growth is good for development or is at least neutral; population pessimists, who say that population growth has already gone too far to avoid disaster; and those (including myself) who believe in the importance of spurring the demographic transition to lower fertility rates in the poorest countries.
Population optimists maintain that there are no real bounds to the Earth’s population because technology can and will keep ahead of the curve. One variant of this optimism is associated with the ideas of economists Simon Kuznets and Michael Kremer, who have each argued that a larger global population will tend to bring about the very technological advances that are needed to sustain that larger population. From their viewpoint, an important part of economic advance comes from the scientific and technological discoveries of geniuses in society. These extraordinary individuals represent a small but relatively constant proportion of the population.

According to the "marginal productivity theory" developed by economists
from the 1890s to the 1940s, the share in total costs of an input into production
such as horses or land or labor is the farmer's opinion of the percentage
change in final output that will come from 1 percent more of the input. The
theory is true if farmers face constant returns to scale and have no market
power and are in the economist's sense rational.
18. Hansen 1938, 1941, out of Keynes 1937.
19. Fogel 2005.
20. Tunzelmann 2003, p. 89.
21. McCloskey 1995.
22. Feinstein 2003, p. 45. The table stands as a monument to the massive scholarly
effort of numerous economic historians since Simon Kuznets invented the
methods in the 1930s and 1940s.
23. Feinstein 2003, p. 46.
24. Schumpeter 1939, Vo. I, p. 223. The next quotation is from p. 224.
125
25. Schumpeter 1954, p. 78.
126
Chapter 12:
Nor Because of a Rise of Greed or of a Protestant Ethic
Nor does modern innovation have anything unusually “greedy”
about it. In characterizing capitalism in 1867 as “solely the restless
stirring for gain” Marx said he was quoting the bourgeois economist J.

…

The prehistory of thrift was revolutionized around 1960 when
economists and economic historians realized with a jolt that thriftiness
and savings could not explain the Industrial Revolution. The economists
such as Abramowitz, Kendrick, and Solow discovered that only a
smallish fraction even of recent economic growth can be explained by
routine thrift and miserly accumulation. At the same time the economic
historians were bringing the news that in Britain the rise in savings was
too modest to explain much at all. Simon Kuznets and later many other
economists such as Charles Feinstein provided the rigorous accounting
of the fact—though as students of capital accumulation they could never
quite overcome their initial hypothesis that Capital Did The Trick. The
aggregate statistical news was anticipated in the 1950s and 1960s by
numerous economic historians of Britain such as François Crouzet and
Philip Cottrell and Sidney Pollard, in detailed studies of the financing of
industry.

…

Elsewhere it constructs by government fiat great
armies to crush dissent and great dams that will silt up in twenty years.
All right. Again: what then explains innovation?
New thoughts, new habits of the mind, what Mokyr calls the
“industrial Enlightenment.” “The rise of our standard of living,” wrote
Hayek, “is due at least as much to an increase in knowledge” as to
accumulation of capital.3 The great economist Simon Kuznets, notes his
student Richard Easterlin, believed that “the ‘givens’ of economics —
technology, tastes, and institutions — are the key actors in historical
change, and hence most economic theory has, at best, only limited
relevance to understanding long-term change.”4 Mokyr and Goldstone
and Jacob and Tunzelmann and I and some others would go one step
further, to ideas. It was ideas of steam engines and light bulbs and
computers that made Northwestern Europe and then much of the rest of
the world rich, not new accumulations from saving.

To summarize: he occasionally sought to make use of the best available statistics of the day (which were better than the statistics available to Malthus and Ricardo but still quite rudimentary), but he usually did so in a rather impressionistic way and without always establishing a clear connection to his theoretical argument.
9. Simon Kuznets, “Economic Growth and Income Inequality,” American Economic Review 45, no. 1 (1955): 1–28.
10. Robert Solow, “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics 70, no. 1 (February 1956): 65–94.
11. See Simon Kuznets, Shares of Upper Income Groups in Income and Savings (Cambridge, MA: National Bureau of Economic Research, 1953). Kuznets was an American economist, born in Ukraine in 1901, who settled in the United States in 1922 and became a professor at Harvard after studying at Columbia University.

…

But what do we really know about its evolution over the long term? Do the dynamics of private capital accumulation inevitably lead to the concentration of wealth in ever fewer hands, as Karl Marx believed in the nineteenth century? Or do the balancing forces of growth, competition, and technological progress lead in later stages of development to reduced inequality and greater harmony among the classes, as Simon Kuznets thought in the twentieth century? What do we really know about how wealth and income have evolved since the eighteenth century, and what lessons can we derive from that knowledge for the century now under way?
These are the questions I attempt to answer in this book. Let me say at once that the answers contained herein are imperfect and incomplete. But they are based on much more extensive historical and comparative data than were available to previous researchers, data covering three centuries and more than twenty countries, as well as on a new theoretical framework that affords a deeper understanding of the underlying mechanisms.

…

Accumulation ends at a finite level, but that level may be high enough to be destabilizing. In particular, the very high level of private wealth that has been attained since the 1980s and 1990s in the wealthy countries of Europe and in Japan, measured in years of national income, directly reflects the Marxian logic.
From Marx to Kuznets, or Apocalypse to Fairy Tale
Turning from the nineteenth-century analyses of Ricardo and Marx to the twentieth-century analyses of Simon Kuznets, we might say that economists’ no doubt overly developed taste for apocalyptic predictions gave way to a similarly excessive fondness for fairy tales, or at any rate happy endings. According to Kuznets’s theory, income inequality would automatically decrease in advanced phases of capitalist development, regardless of economic policy choices or other differences between countries, until eventually it stabilized at an acceptable level.

.* The school emphasized the importance of understanding the history of how the material production system has changed, both influencing and influenced by law and other social institutions.12
The Developmentalist tradition in the modern world: Development Economics
The Developmentalist tradition was advanced in its modern form in the 1950s and the 1960s by economists such as, in alphabetical order, Albert Hirschman (1915–2012), Simon Kuznets (1901–85), Arthur Lewis (1915–91) and Gunnar Myrdal (1899–87) – this time, under the rubric of Development Economics. Writing mostly about the countries on the periphery of capitalism in Asia, Africa and Latin America, they and their followers not only refined the earlier Developmentalist theories but also added quite a lot of new theoretical innovations.
The most important innovation came from Hirschman, who pointed out that some industries have particularly dense linkages (or connections) with other industries; in other words, they buy from – and sell to – a particularly large number of industries.

…

When things started to unravel in the late 1980s, few wanted to defend a system that could now only be described as hypocritical.
The most reasonable conclusion to draw from the review of various theories and empirical evidence is that neither too little nor too much inequality is good. If it is excessively high or excessively low, inequality may hamper economic growth and create social problems (of different kinds).
The Kuznets hypothesis: inequality over time
Simon Kuznets, the Russian-born American economist, who won one of the first Nobel Prizes in Economics (in 1971 – the first one was in 1969), proposed a famous theory about inequality over time. The so-called Kuznets hypothesis is that, as a country develops economically, inequality first increases and then decreases. This hypothesis has very strongly influenced the way in which the study of inequality has been conducted over the last half century, so it is important to know what it is about.

All this after a decade of rule by a Labour government that, historically, would happily have burnished its redistributional credentials.
THE EMERGING GAP
As we have seen, growing income inequality is not confined to parts of the developed world. China has witnessed a widening gap between a growing middle class and the majority of people who still remain wrapped in poverty. Other emerging economies have also seen a growing divide between rich and poor.11 These developments are consistent with the thoughts of Simon Kuznets (1901–85), arguably the father of modern national accounts, who described the changes in the distribution of income as economies shifted from agrarian to urban societies.12 The argument is straightforward. Urban workers are more productive than their inefficient rural counterparts. As urban development lifts off, so the nation as a whole becomes more productive. The benefits initially accrue almost entirely to the urban workers.

…

Francis Jones, Daniel Annan and Saef Shah, ‘The distribution of household income 1977 to 2006/07’, Office for National Statistics, Economic and Labour Market Review, 2.12 (2008), pp. 18–31.
11. Some emerging economies, notably those in Latin America, have always had high levels of income inequality: political systems have allowed the middle classes to extract reasonable incomes even though rates of economic growth have often been poor.
12. Simon Kuznets, ‘Toward a theory of economic growth’. in Robert Lekachman, National Policy for Economic Welfare at Home and Abroad (Doubleday, Garden City, NY, 1955).
13. Source: UN Food and Agriculture Organization.
14. Source: Prabhu Pingali, Westernization of Asian Diets and the Transformation of Food Systems: Implications for Research and Policy, ESA Working Paper No. 04–17, Rome, September 2004.
15.

We will build roads
and railways, develop atomic power and help with the re-equipment and modernization of the whole of industry.’
WHY DID AN APPARENTLY POOR PACIFIC ISLAND HIT THE TOP?
37
In fact, the idea of GDP dated back further than 1954, to the battle to rescue the
world from the Great Depression, and then from Hitler. It was developed by some of
the young economists around Keynes and Simon Kuznets in the USA as a way of
working out the total productive power of the economy, a by-product of those
techniques of investment that allowed Britain to out-produce Nazi Germany. Once
the war was over, this seemed to provide the perfect scorecard for an impoverished
nation: measure national success by the total amount of money that changed hands,
and nothing else.
As a result, the ‘growth’ has been gigantic, the technological innovations astonishing, and the living standards – if you measure them in terms of money – have shot
up.

…

She wrote a paper for the
Women and Food conference in Sydney in 1982, and submitted it for comment to
Australia’s deputy chief statistician. ‘His memo of reply to me – a classic of sexist
economic assumptions – was one of the major incentives to write this book,’ she
wrote in the introduction.
WHY DID AN APPARENTLY POOR PACIFIC ISLAND HIT THE TOP?
39
She also discovered the lists of students who worked under the economist Simon
Kuznets (who originally warned against over-reliance on growth as a measure) in the
1930s to develop national accounting in the first place, before it had become the
theory of economic growth. The names were all men, but at the bottom was an
important note: ‘Five clerks, all women with substantial experience and know-how,
assisted importantly in this work.’ These women – all with substantial experience
apparently – had become non-persons.

This is corroborated by the fact that the
85
connection between inequality and growth is quite clear in nondemocratic
states, but not apparent in modern, liberal ones.13
But can the opposite effect also hold? Is it true that increased
growth leads to greater inequality, as is widely maintained? Economists
sometimes refer to ‘‘Kuznets’s inverted U-curve,’’ which is
based on a 1955 article by the economist Simon Kuznets, who
argued that economic growth in a society initially leads to greater
inequality and only after some time to a reduction of inequality.
Many have accepted this thesis as truth, and it is sometimes used
to discredit the idea of growth, or at least to demand redistributive
policies. Kuznets himself did not draw any such drastic conclusions.
On the contrary, he declared that his article was based
on ‘‘perhaps 5 percent empirical information and 95 percent
speculation,’’ adding that ‘‘so long as it is recognized as a collection
of hunches calling for further investigation rather than a set of
fully tested conclusions, little harm and much good may result.’’14
If we follow Kuznets’s recommendation and investigate what
has happened since the 1950s, we can see that his preliminary
conclusion is not universally valid.

…

Concerning equality of assets versus equality of income, see Klaus Deininger and
P. Olinto, Asset Distribution, Inequality, and Growth, World Bank Policy Research
Paper no. 2375 (Washington: World Bank, 2000). For the connection with democracy,
296
see Klaus Deininger and Lyn Squire, ‘‘New Ways of Looking at the Old Issues: Asset
Inequality and Growth,’’ Journal of Development Economics 57 (1998): 259–87.
14. Simon Kuznets, ‘‘Economic Growth and Income Inequality,’’ American Economic
Review 45 (March 1955): 26.
15. World Bank, Income Poverty: Trends in Inequality (Washington: World Bank, 2000),
http://www.worldbank.org/poverty/data/trends/inequal.htm. The data refuting Kuznets
are presented in Deininger and Squire, pp. 259–287. For a review of the
research, see Arne Bigsten and Jo¨rgen Levin, Tillva¨ xt, inkomstfo¨rdelning och
fattigdom
i u-la¨ nderna (Stockholm: Globkom, September 2000), http://www.globkom.net/
rapporter.phtml.
16.

Friedman got to know Mitchell and his intellectual outlook better while working for the National Bureau between 1937 and 1940 than he did during his Columbia graduate student year. At the same time, his Columbia ties deepened as a result of his greater association with Mitchell and others at the National Bureau who were affiliated with the university. Friedman lectured part-time at Columbia and associated socially with many from the Columbia crowd.
At the National Bureau, Friedman served as research assistant to Columbia graduate Simon Kuznets, a Mitchell disciple, who had organized the Conference on Research in National Income and Wealth. Kuznets was one of Friedman’s last mentors, along with Burns and Jones at Rutgers, Viner and Knight at Chicago, Hotelling at Columbia, and Mitchell at the National Bureau. Kuznets impressed on Friedman the value of Mitchell’s quantitative and statistical approach. Some indication of Kuznets’s early prominence is that John Maynard Keynes referred to him in his landmark The General Theory of Employment, Interest, and Money, published in 1936.

…

Friedman received his Ph.D. in economics from Columbia in 1946, thirteen years after enrolling there. The delay was the result of unusual circumstances. Columbia at this time required that a candidate’s dissertation be published before the degree would be awarded. A major controversy arose with respect to Friedman’s dissertation, Income from Independent Professional Practices, which he co-wrote with Simon Kuznets of the National Bureau.
Kuznets wrote a preliminary manuscript, which Friedman completely rewrote between 1938 and 1941. The study covers five professional fields, including doctors and dentists. The average income of physicians at this time exceeded that of dentists by about one-third. Friedman and Kuznets argued that the reason for this difference was in part that the American Medial Association (AMA) hindered entrance to the medical profession, restricting the supply of doctors and thereby driving their price up.

This proximity fostered innovation that triggered a dynamic of lower costs and further local concentration in the nations that started ahead (the North Atlantic economies and Japan). The flip side was a downward spiral in the ancient manufacturing consumption / production clusters. This industrialization of the North and deindustrialization of the South is one of the most striking aspects of Phase Three’s reversal of fortunes.
As Simon Kuznets wrote in Economic Growth and Structure, “Before the nineteenth century and perhaps not much before it, some presently underdeveloped countries, notably China and parts of India, were believed by Europeans to be more highly developed than Europe.”4 During the eighteenth century, the Indian cotton textile industry was the global leader in terms of quality, production, and exports. Eighteenth-century India and China also produced the world’s highest-quality silk and porcelain.

…

See also Bairoch, Economics and World History (London: Harvester Wheatsheaf, 1993); and Bairoch and Richard Kozul-Wright, “Globalization Myths: Some Historical Reflections on Integration, Industrialization, and Growth in the World Economy,” Discussion Paper 113, United Nations Conference on Trade and Development, Geneva, 1996.
3. The quote comes from a speech Bismarck gave in 1879 supporting a protectionist law. Quoted in William Harbutt Dawson, Protection in Germany: A History of German Fiscal Policy during the Nineteenth Century (London: P. S. King & Son, 1904).
4. Simon Kuznets, Economic Growth and Structure: Selected Essays (London: Heinemann Educational Books, 1965).
5. Lant Pritchett, “Divergence, Big Time,” Journal of Economic Perspectives 11, no. 3, (1997): 3–17; Kenneth Pomeranz, The Great Divergence: China, Europe, and the Making of the Modern World Economy (Princeton, NJ: Princeton University Press, 2000).
6. Charles P. Kindleberger, “Commercial Policy between the Wars,” in Cambridge Economic History of Europe, ed.

pages: 273words: 87,159

The Vanishing Middle Class: Prejudice and Power in a Dual Economy
by
Peter Temin

Lewis argued that the capitalist sector grows from retained earnings. He assumed that members of the capitalist sector reinvest their retained earnings. In other words, both models rely on savings, but the determinants of investment are quite different. Lewis and Solow were working within a Keynesian framework in which capital referred to the means of production: factories and machines are the prime examples.
Simon Kuznets, a third Nobel Laureate in economics, also was focused on economic growth in the 1950s. Using the data available to him, he formulated what came to be called the Kuznets Curve that asserted that income inequality would first rise and then fall during economic growth. He was reacting to the declining income inequality he observed around him and a political-economic view that richer countries would choose policies that increased equality.

…

Right Turn: The Decline of the Democrats and the Future of American Politics. New York: Hill and Wang.
Fields, Karen E., and Barbara J. Fields. 2012. Racecraft: The Soul of Inequality in American Life. New York: Verso.
Fitzsimmons, Emma G., and David W. Chen. 2015. “Aging Infrastructure Plagues Nation’s Busiest Rail Corridor.” New York Times, July 26.
Fogel, Robert W. 1987. “Some Notes on the Scientific Methods of Simon Kuznets.” NBER Working Paper No. 2461, December.
Foner, Eric. 1988. Reconstruction: America’s Unfinished Revolution, 1863–77. New York: Harper and Row.
Forsberg, Mary E. 2010. “A Hudson Tunnel That Goes One Way.” New York Times, October 27.
Fortner, Michael Javen. 2015. “The Real Roots of the ’70s Drug Laws.” New York Times, September 28.
Fourcade, Marion, Etienne Ollion, and Yann Algan. 2015. “The Superiority of Economists.”

6.We cannot readily calculate the corresponding proportion in 1948 because the Census Bureau online historical data series for annual CPS-based estimates of age-and sex-specific enrollments only extend back to 1961. See “School Enrollment Reports and Tables from Previous Years,” U.S. Census Bureau, http://www.census.gov/hhes/school/data/cps/previous/index.html.
CHAPTER 4
1.Robert William Fogel et al., Political Arithmetic: Simon Kuznets and the Empirical Tradition in Economics (Chicago: University of Chicago Press, 2013), introduction, http://www.nber.org/chapters/c12912.pdf.
2.Dora L. Costa, “The Wage and the Length of the Work Day: From the 1890s to 1991” (working paper, National Bureau of Economic Research, Cambridge, MA, April 1998), http://www.nber.org/papers/w6504.
3.Dora L. Costa, The Evolution of Retirement: An American Economic History, 1880–1990, (Chicago: University of Chicago Press, 1998), chapter 2.
4.This upsurge also coincided with a marriage boom and a baby boom—meaning that men may not only have been more capable of entering the labor market, but more motivated to do so as well.
5.Derived from the Human Mortality Database: http:www.mortality.org.
6.

For a consideration of the specific window of opportunity that was open to a command economy in the middle of the twentieth century, see Stephen Broadberry and Sayantan Ghosal, ‘Technology, organisation and productivity performance in services: lessons from Britain and the United States since 1870’, Structural Change and Economic Dynamics vol. 16 issue 4 (December 2005), pp. 437–66.
15 Indeed, there was a philosophical issue here: for the planners’ philosophical fidelity to Marx, despite everhing, see Paul Craig Roberts, Alienation and the Soviet Economy (Albuquerque: University of New Mexico Press, 2002).
16 This made it difficult to compare Soviet growth: there is a whole specialised literature, spread over fifty years, on the difficulty of assessing the USSR’s growth rate. For an accessible way in, see Alec Nove, Economic History of the USSR, and Paul R. Gregory and Robert C. Stuart, Russian and Soviet Economic Performance and Structure, 6th edn. (Reading MA: Addison-Wesley, 1998). For Western calculations during the Cold War, see Abram Bergson and Simon Kuznets, eds, Economic Trends in the Soviet Union (Cambridge MA: Harvard University Press, 1963); Janet G. Chapman, Real Wages in Soviet Russia Since 1928, RAND Corporation report R-371-PR (Santa Monica CA, October 1963); Franklyn D. Holzman, ed., Readings on the Soviet Economy (Chicago: Rand-McNally, 1962). As a useful retrospective, see Angus Maddison, ‘Measuring the Performance of a Communist Command Economy: An Assessment of the CIA Estimates for the USSR’, Review of Income and Wealth vol. 44 no. 3 (September 1998), pp. 307–23.

…

For a consideration of the specific window of opportunity that was open to a command economy in the middle of the twentieth century, see Stephen Broadberry and Sayantan Ghosal, ‘Technology, organisation and productivity performance in services: lessons from Britain and the United States since 1870’, Structural Change and Economic Dynamics vol. 16 issue 4 (December 2005), pp. 437–66.
15 Indeed, there was a philosophical issue here: for the planners’ philosophical fidelity to Marx, despite everything, see Paul Craig Roberts, Alienation and the Soviet Economy (Albuquerque: University of New Mexico Press, 2002).
16 This made it difficult to compare Soviet growth: there is a whole specialised literature, spread over fifty years, on the difficulty of assessing the USSR’s growth rate. For an accessible way in, see Alec Nove, Economic History of the USSR, and Paul R. Gregory and Robert C. Stuart, Russian and Soviet Economic Performance and Structure, 6th edn. (Reading MA: Addison-Wesley, 1998). For Western calculations during the Cold War, see Abram Bergson and Simon Kuznets, eds, Economic Trends in the Soviet Union (Cambridge MA: Harvard University Press, 1963); Janet G. Chapman, Real Wages in Soviet Russia Since 1928, RAND Corporation report R-371-PR (Santa Monica CA, October 1963); Franklyn D. Holzman, ed., Readings on the Soviet Economy (Chicago: Rand-McNally, 1962). As a useful retrospective, see Angus Maddison, ‘Measuring the Performance of a Communist Command Economy: An Assessment of the CIA Estimates for the USSR’, Review of Income and Wealth vol. 44 no. 3 (September 1998), pp. 307–23.

From what we know—and we know only a small part—of the legal and the illegal ways of the heavily taxed, we seriously wonder if the drop from 19.1 to 7.4 per cent is as much an illustration of how well the corporate rich have learned to keep information about their income from the government than of an ‘income revolution.’ No one, however, will ever really know. For the kind of official investigation required is not politically feasible. See Simon Kuznets, ‘Shares of Upper Income Groups in Income and Savings,’ National Bureau of Economic Research, Inc., Occasional Paper No. 35, pp. 67 and 59; and Simon Kuznets, assisted by Elizabeth Jenks, Shares of Upper Income Groups in Income and Savings (New York: National Bureau of Economic Research, Inc., 1953). For one debate over the methods employed by Kuznets by means of a different interpretation of tax data, see J. Keith Butters, Lawrence E. Thompson and Lyn L. Bollinger, Effects of Taxation: Investment by Individuals (Cambridge: Harvard University Press, 1953), especially p. 104.

…

If one were to include these in the 1949 returns to make them comparable with the 513 in 1929, there would be 145 million-dollar incomes in 1949. On the proportion of families with incomes of less than $2,000 in 1939, see The New York Times,’ (5 March 1952) presentation of Bureau of Census data.
9. ‘Preliminary Findings of the 1955 Survey of Consumer Finances,’ Federal Reserve Bulletin, March 1955, page 3 of reprint.
10. Simon Kuznets, an expert with tax-derived data, finds that the share in total income after taxes of the richest 1 per cent (which goes down to families earning a mere $15,000) of the population has decreased from 19.1 per cent in 1928 to 7.4 per cent in 1945; but he carefully adds: ‘It must be evident from our presentation that we encountered considerable difficulty in contructing estimates with a high degree of reliability and in unearthing data for checking the several hypotheses.’

Top Incomes in the United States
The study of income inequality was transformed by a 2003 study by two economists, Thomas Piketty, now of the Paris School of Economics, and Emmanuel Saez of the University of California at Berkeley.24 It had long been known that the data on incomes from household surveys were not very useful for looking at very high incomes; there are too few such people to show up regularly in nationally representative surveys. (Even if approached at random, they might also be less likely to answer.) Piketty and Saez greatly extended a method that had been originally used in 1953 by Nobel laureate economist Simon Kuznets, who worked with data from income-tax records.25 The rich, like everyone else, have no choice but to file tax returns, and so they are fully represented in the income-tax data. Piketty and Saez’s results have changed the way that people think about income inequality, particularly at the top of the distribution. Later studies have looked at comparable data from other countries around the world, so that we can extend these insights beyond the United States.

…

Lee, 1999, “Wage inequality in the United States during the 1980s: Rising dispersion or falling minimum wage,” Quarterly Journal of Economics 114(3): 977–1023.
23. Congressional Budget Office, 2011, Trends in the distribution of household income between 1979 and 2007, Washington, DC.
24. Thomas Piketty and Emmanuel Saez, 2003, “Income inequality in the United States 1913–1998,” Quarterly Journal of Economics 118(1): 1–41.
25. Simon Kuznets, 1953, Shares of upper income groups in income and saving, National Bureau of Economic Research.
26. Incomes in the Piketty-Saez analysis are taxable incomes and are incomes of tax units, not of families or of households, which would include unrelated individuals. The Congressional Budget Office income numbers quoted earlier include some of the items included in the national accounts, but not in the surveys.

Behind all that growth—much of dubious value and negligible yields—was a deepening maw of debt, largely based on inflationary expectations that would have to be fulfilled if the debt was to be repaid in a stagnant economy. Yet this expected inflation would radically erode the capital prospects of American business unless taxes on wealth were drastically reduced.
In this predicament the liberal economists found it possible to sing all their same old songs. They cited Denison’s Law to show that savings rates over the centuries had maintained an even level, regardless of interest rates, although Nobel winner Simon Kuznets had widely different estimates; and the idea that interest rates do not affect savings is self-evidently false. As economists have done for centuries, the liberals speculated that the vital energy and innovative genius of capitalism were near exhaustion and that government would now have to take the lead. They spoke of loopholes and martini lunches and hunger in America. They cried of unemployment and monopoly profits and unequal distribution of wealth and income.

In a different but related
context, and for rather different reasons, Gary Becker verged on this perspective when
he said that sunk costs are not sunk in the political sector. See "A Theory of
Competition among Pressure Groups for Political Influence," Quarterly Journal of
Economics 98 (Aug. 1983): 383.
7. Edward S. Herman, Corporate Control, Corporate Power (New York: Cambridge
University Press, 1981), pp. 299-300. For comparative international data on the
growth of government, see Simon Kuznets, Modern Economic Growth: Rate, Structure,
and Spread (New Haven, Conn.: Yale University Press, 1966), pp. 236-239; Leila
Pathirane and Derek W. Blades, "Defining and Measuring the Public Sector: Some
International Comparisons," Review of Income and Wealth 28 (Sept. 1982): 261-289;
Alt and Chrystal, Political Economics, pp. 199-219.
8. James T. Bennett and Manuel H. Johnson, The Political Economy of Federal
Government Growth: 1959-1978 (College Station, Tex.: Center for Education and
Research in Free Enterprise, 1980), pp. 70-72, citing Moses Abramovitz and Vera F.

Without e ective rules one is forced to do
things that one nds personally questionable to stay in business. That is why businesses
set up their own self-regulatory organizations, which impose rules that are usually
(though, to be sure, not always) in the public interest.
But there are some who think that regulators are not doing anything of the sort.
Milton Friedman, following his 1954 study with Simon Kuznets of occupational incomes
and regulation, made a strongly worded argument against regulation, particularly
occupational licensing, in his 1962 book Capitalism and Freedom.1 He thought regulation
was little more than a cynical ploy to limit the supply of services so as to keep their
prices high. Friedman’s book turned out to be very in uential, creating a measure of
public distaste for regulation.

But as well-paid jobs began to vanish and workers found themselves running in place, desperate to maintain the material gains and upward mobility of the last quarter-century, the welfare state became as much a burden as a benefit. The state’s inability to deliver the ever-rising living standards it had promised would lead to a palpable social anger, with substantial political consequences.
Why, in the postwar years, had life gotten so much better for almost everyone? The best-known answer, the one that most influenced elite opinion, was advanced by the renowned American economist Simon Kuznets. His explanation, which linked the development of an advanced industrial society to a more equitable distribution of income, became known as the Kuznets curve.
Kuznets, trained as a statistician in Bolshevik Russia, fled to the United States in 1922. He studied economics at Columbia University, earning his master’s degree one year ahead of Arthur Burns, and then became a protégé of business cycle theorist Wesley Mitchell, who would also guide Burns’s career.

…

National Income 1929–32: Letter from the Acting Secretary of Commerce Transmitting in Response to Senate Resolution No. 220 (72nd Congress) a Report on National Income, 1929–32 (Washington, DC, 1934), 7. Gross national product was for many years the most widely followed measure of economies’ size. It has largely been supplanted by gross domestic product, a measure that excludes net income from foreign sources.
2. Simon Kuznets, “Economic Growth and Income Inequality,” American Economic Review 45 (1955): 1–28. Kuznets acknowledged that his findings pertained to the economies of Europe, North America, and Japan, and that the distribution of income in “underdeveloped” countries might not even out in the same way.
3. The data on income distribution in this paragraph are taken from Anthony B. Atkinson and Salvatore Morelli, “Chartbook of Economic Inequality,” at www.chart-bookofeconomicinequality.com, accessed January 8, 2014.

In the 1890s Eduard Bernstein insisted that Marx’s proletarianization thesis did not hold because the social structure was clearly becoming more diverse and wealth was spreading to ever broader segments of society.
It was not until after World War II, however, that it became possible to measure the decrease in wage and income inequality in the Western countries. New predictions were soon forthcoming. The most celebrated was that of Simon Kuznets (1955): according to Kuznets, inequality would everywhere be described by an inverted U curve. In the first phase of development, inequality would increase as traditional agricultural societies industrialized and urbanized. This would be followed by a second phase of stabilization, and then a third phase in which inequality would substantially decrease. This pattern—of growing inequality in the nineteenth century followed by declining inequality after that, has been well studied in the case of the United Kingdom (Williamson, 1985) and the United States (Williamson and Lindert, 1980).

What’s more, we can observe that the rise in
inequality at the moment of Eastern Europe’s transition to
a market economy was, in several countries, only temporary. Inequality fell once the economy had fully settled into
the new regime and the mechanisms for redistributing income had been reconfigured. We don’t observe such a turnaround among the Asian giants.
The Forces behind R ising Inequality 113
Globalization, Deregulation, Inequality
Around sixty years ago, the U.S. economist Simon Kuznets,
who had studied the evolution of inequality in several developed countries, formulated a hypothesis that would become widely influential. His idea was that in an initial
stage, the process of economic development increases inequality by displacing a portion of the population from traditional occupations toward more productive, but also
more heterogeneous, jobs, thus creating more inequality.

Real incomes across the distribution grew strongly and in parallel, -with incomes of the poorer half of the population even outgrowing those of the richer over some periods, resulting in a mild compression of the income distribution (that is, a trend toward greater equality).
Of course, even at its most egalitarian postwar moment, the U.S. remained a polarized society, but it was still widely thought that something had changed to make the new arrangements permanent. In 1955, Simon Kuznets pubHshed his famous "inverted U" theory of capitalist evolution: that income inequaHty rises in the early stages of development and faUs as economies mature. Economists came to believe this as a fact of their
After the New Economy
.525 .500 .475 .450
.425
.4001-.375
income inequality
(Cini index) U.S., 1913-2001
"science," and you still hear it from development specialists at the World Bank and in academia to excuse the vast increase in inequaUty in the Third World over the last fifteen years.

The Virginia case is discussed in chapter vii.
6 The increased return may be only partly in a monetary form; it may also consist of non-pecuniary advantages attached to the occupation for which the vocational training fits the individual. Similarly, the occupation may have non-pecuniary disadvantages, which would have to be reckoned among the costs of the investment.
7 For a more detailed and precise statement of the considerations entering into the choice of an occupation, see Milton Friedman and Simon Kuznets, Income from Independent Professional Practice (New York: National Bureau of Economic Research, 1945), pp. 81–95, 118–37.
8 See G. S. Becker, “Underinvestment in College Education?” American Economic Review, Proceedings L (1960), 356–64; T. W. Schultz, “Investment in human Capital,” American Economic Review, LXI (1961), 1–17.
9 Despite these obstacles to fixed money loans, I am told that they have been a very common means of financing education in Sweden, where they have apparently been available at moderate rates of interest.

Gross domestic product (GDP) allows economists to plot and compare our national economy’s growth, disparities, ranking, and power. Today the GDP of the world is a little more than $60 trillion. The United States and the European Union account for approximately one-third of this amount.
The simplicity of the measurement of GDP is also its downfall. The argument against GDP fetishism is that we are more than what we make. Even the inventor of the GDP, the late Russian-American economist Simon Kuznets, was aware that the model of GDP had significant shortcomings. “The welfare of a nation can scarcely be inferred from a measure of national income,” he said in 1934. Imagine walking into a cocktail party and instead of making casual conversation everyone asked, “How much money do you make?” At the very least you would find it embarrassingly gauche, but you probably also would be somewhat offended.

Princeton economists Gene Grossman and Alan Krueger made a similar argument and were among the first to demonstrate how this works in a 1991 paper about free trade.36 They showed that, although “economic growth brings an initial phase of deterioration” in environmental quality, it is “followed by a subsequent phase of improvement.”37 Such an inverted U curve is often referred to as an environmental Kuznets curve (EKC), named after economist Simon Kuznets, who argued that as incomes rise, there is an initial phase of great inequality, which is followed later by a reduction of that inequality. This theory, which won Kuznets the Nobel Prize in 1971, works in a similar way when applied to the environment. A typical EKC looks like Figure 3.4, and the actual numbers will vary depending on the environmental problems described (air pollutants, deforestation, etc.).

Cornucopians have tended to be political and polemical, extreme free marketeers who reject the science of climate change and environmental degradation.
Few economists go all the way with the Cornucopians, but a larger number are believers in a more moderate variant of eco-optimism, which argues that growth itself will save the environment. Represented in a concept called the Environmental Kuznets Curve, it is modeled on studies of inequality carried out in the 1950s and ’60s by the economist Simon Kuznets. Kuznets saw a humpback data pattern across nations. At a given point in time, some had low levels of both income and inequality, some had more inequality and more income, and some had high incomes with low inequality. From this finding, most economists came to believe that countries must endure a growing concentration of income as they develop, but that once they become wealthy, they can buy themselves more fairness.

These were therefore short cycles.
Mitchell’s research was independently validated by the work of Joseph Kitchin (1861–1932).7 In 1923, Kitchin published his study of cycles in American and British data for 1890–1922. He found short cycles of 40 months and major cycles of between 7 and 11 years. Kitchin thus also corroborates the ten-year cycle of Juglar and Marx.
Other economists such as Simon Kuznets, a Nobel Laureate, and Moses Abramovitz as well as W. Arthur Lewis, another Nobel Prize winner, discovered longer cycles of between 14 and 22 years in length. Cycles could be thus discerned in the data. But an explanation for what caused cycles remained elusive: Was it investment in house-building, or demographics? The long gestation period required for large-scale investment in steel and shipbuilding?

Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages
by
Carlota Pérez

Each technological revolution, then, is an explosion of new products, industries and infrastructures that gradually gives rise to a new techno-economic
paradigm, which guides entrepreneurs, managers, innovators, investors and
consumers, both in their individual decisions and in their interactions, for the
whole period of propagation of that set of technologies.
A. Five Technological Revolutions in Two Hundred Years
At several moments in his thinking about development, Simon Kuznets explored the notion of epochal innovations as those capable of inducing significant changes in the direction of growth. In his Nobel lecture in 1971, he stated:
The major breakthroughs in the advance of human knowledge, those that constituted the dominant sources of sustained growth over long periods and spread to a
substantial part of the world, may be termed epochal innovations. And the changing course of economic history can perhaps be subdivided into economic epochs,
each identified by the epochal innovation with the distinctive characteristics of
growth that it generated.9
In that particular instance he was mainly referring to the epochs that lasted
several centuries, of which capitalism since the first industrial revolution would
8.
9.

pages: 775words: 208,604

The Great Leveler: Violence and the History of Inequality From the Stone Age to the Twenty-First Century
by
Walter Scheidel

However, although information on housing inequality derived from house-tax data and reported wages has been marshaled to show that incomes continued to become more unequal during the first half of the nineteenth century as well, it remains controversial how much weight this particular material can bear.26
Figure 3.4Inequality trends in Latin America in the long run
This is even more true of an earlier notion that various indicators of inequality rose during the first half or two-thirds of the nineteenth century and subsequently declined until the 1910s, producing a gently inverted U-curve that would be compatible with the economist Simon Kuznets’s idea that economic modernization might first increase and then lower inequality within a society in transition. The observation that wage dispersal grew between 1815 and 1851, peaked in the 1850s and 1860s, and subsequently declined until 1911 may be an artifact of the underlying data for different professions, which exhibit contradictory trends. Similarly, measures of housing inequality constructed from house duties that suggest Ginis of 0.61 in 1830 and 0.67 in 1871 for all inhabited houses and a decline from 0.63 in 1874 to 0.55 in 1911 for private residences likewise cannot readily be taken at face value.

…

Considering the severity of these transformative shocks and the multifaceted nature of their effect on overall social, political, and economic development, the question of how much subsequent levels of inequality were determined by economic growth and per capita output as such would seem rather meaningless.2
In the following, I explore the contribution of economic development to income inequality in two ways: by considering claims that per capita GDP per se is systematically correlated with inequality measures and by focusing on parts of the world that were not involved in the violent dislocations from 1914 to 1945—or up to the 1970s if we include communist revolutions in Asia—or, more precisely, that were not as directly involved in them as were most rich Western countries and large parts of Asia: Africa, the Middle East, and, above all, Latin America.
We owe the classic formulation of the idea that income inequality is linked to and driven by economic development to economics Nobel laureate Simon Kuznets. Back in the 1950s, Kuznets, a pioneer in the study of income disparities in the United States, proposed a deliberately simple model. Economic advances beyond the traditional agrarian mode initially raise inequality if mean incomes are higher—and perhaps also more unevenly distributed—in cities than in the countryside, and urbanization increases the urban share of the population and the weight of the urban sector in the national economy, thereby inflating income differentials and also overall inequality.

But not until after 31,709.8 years would you count your trillionth dollar (and even then you would be less than one-fourth of the way through the pile of money representing America’s national debt).
That is what $1 trillion is.
What is interesting is that it is becoming increasingly evident that most of these inconceivably vast sums that get bandied about by economists and policy makers are almost certainly miles out anyway. Take gross domestic product, the bedrock of modern economic policy. GDP was a concept that was originated in the 1930s by the economist Simon Kuznets. It is very good at measuring physical things—tons of steel, board feet of lumber, potatoes, tires, and so on. That was all very well in a traditional industrial economy. But now the greater part of output for nearly all developed nations is in services and ideas—things like computer software, telecommunications, financial services—which produce wealth but don’t necessarily, or even generally, result in a product that you can load on a pallet and ship out to the marketplace.

Happiness appeared to be a candyfloss concept, attractive but ultimately fluffy and insubstantial – hardly the handy ready reckoner that government needed to decide its priorities.
So it was that another yardstick for progress came to be accepted: money. Economists, not social scientists, were invited to sit closest to the seat of power. Tangible wealth, rather than ethereal well-being, became the fundamental political goal.
Even finding a single accepted measure of affluence proved tricky, and it wasn’t until the 1930s that Russian-born economist Simon Kuznets came up with the concept of Gross Domestic Product (GDP). For industrialised countries such as Britain, trying to recover from the deprivations of the Second World War in the 1940s and 50s, GDP was embraced as the best way to monitor material and social development. Despite Kuznets’ own warning that his measure should not be used as a surrogate for well-being, those three letters became the focus of UK government activity, recited mantra-like as an incantation for a better life.

Unlike Proudhon and Gesell, Keynes offered no utopian solution (though he did credit Mandeville and Gesell as being among the “brave army of heretics” who called into question traditional economic nostrums) and he didn’t suggest that all inequities should be abolished, just that the size of the differential should be limited. “There is social and psychological justification for significant inequalities of incomes and wealth,” he wrote, “but not for such large disparities as exist today.”
Simon Kuznets, the great modern explicator of inequality, won the Nobel Prize in economics in 1971 for his work suggesting that inequality starts out as relatively minor in agricultural society, grows massively with industrialization, but tends to lessen in the later stages of industrial development. (As a modern example of how this might work, Bill Gates and Warren Buffett are both fabulously wealthy, but the difference between their assets and the wealth of the average American of today is likely less than the gap that existed between John D.

Kennedy
WHEN PRESIDENT HOOVER WAS trying to understand what was happening during the Great Depression and design a program to fight it, a comprehensive system of national accounts did not exist. He had to rely on scattered data like freight car loadings, commodity prices, and stock price indexes that gave only an incomplete and often unreliable view of economic activity. The first set of national accounts was presented to Congress in 1937 based on the pioneering work of Nobel Prize winner Simon Kuznets, who worked with researchers at the National Bureau of Economic Research and a team at the U.S. Department of Commerce. The resulting set of metrics have served as beacons that helped illuminate many of the dramatic changes that transformed the economy throughout the twentieth century.
But as the economy has changed so, too, must our metrics. More and more what we care about in the second machine age are ideas, not things—mind, not matter; bits, not atoms; and interactions, not transactions.

The better state of social security in the United States, compared to
other rich countries, is that our population is growing faster (thanks
to immigration, not to fertility, as it turns out).
A more ethereal reason that there could be positive effects of
higher population is the genius principle. The more babies there
are, the greater is the likelihood that one of them will grow up to be
Mozart, Einstein, or Bill Gates. This effect, first pointed out by Simon
Kuznets and Julian Simon,raises the stock of ideas that can then be
used by any size population to better itself.
Since ideas can be shared with additionalpersons at zero cost-an
unlimited number of people can listen to a Mozart aria-new ideas
are used moreeffectively in large than in small populations. The onetime cost of implementing a new idea can be spread across more
people, all of whom can use the idea at zero cost.

A central mission of Redefining Progress is to spotlight the “bads" that are hiding out in the gross domestic product, a yardstick that has for the last half century been a drug of choice for conventional economists. As long as the GDP goes higher, everything’s cool. Politicians point to a swelling GDP as proof that their economic policies are working, and investors reassure themselves that with the overall expansion of the economy, their stocks will also expand. Yet even the chief architect of the GDP (then GNP), Simon Kuznets, believed that “the welfare of a nation can scarcely be inferred from a measurement like GNP.”5
Here’s why: although the overall numbers continue to rise, many key variables have grown worse. As we have already mentioned, the gap between the rich and everyone else is expanding. In addition, the nation is borrowing more and more from abroad, a symptom of anemic savings and mountains of household debt.

Since 2008, China's headline growth of around 8 percent has been driven by investment funded by new bank lending, from state-controlled banks, averaging around 30–40 percent of GDP. Some 10–20 percent of these loans may prove incapable of being repaid, amounting to losses of 3–8 percent of GDP. If these losses are correctly accounted for by writing them off against income, Chinese growth is much lower.
Economist Simon Kuznets, who formulated the concept of GDP, cautioned against an over-simplified quantitative measurement providing a misleading illusion of precision. Senator Robert Kennedy gave the most eloquent criticism of GDP, highlighting distinctions between quantity and quality of growth:
Our gross national product…if we should judge America by that—counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage.

pages: 443words: 98,113

The Corruption of Capitalism: Why Rentiers Thrive and Work Does Not Pay
by
Guy Standing

This is what platform corporations want, and what neo-liberals have always wanted, because they depict all collective bodies as distorting the market and preventing market clearing.30 The platforms are reducing the rental income gained by those inside occupational communities and transferring that to themselves, further reducing the returns to labour and work.
One of the least analysed aspects of the neo-liberal agenda has been the re-regulation of occupations, including all the great professions. Milton Friedman, an architect of the Chicago school of economics, wrote his first book (with Simon Kuznets) in 1945 on the medical professions, criticising their rent seeking through restricting the supply of doctors, imposing high standards, controlling fees and so on.
When the neo-liberals achieved domination of the economics profession and economic policymaking in the 1980s, they launched an onslaught on occupational self-regulation. This was not deregulation, but state re-regulation. There was a shift to state licensing, usually by boards linked to finance or competition ministries.

.: Inventors Publishing, 1931).
7 “lack of capital” Ibid.
8 more than half will continue to invest their time Thomas Astebro, “Inventor Perseverance After Being Told to Quit: The Role of Cognitive Biases,” Journal of Behavioral Decision Making 20, January 2007.
9 “may be inventors” Scherer, “Invention and Innovation in the Watt-Boulton Steam Engine Venture,” citing Joseph Schumpeter’s Theory of Economic Development.
10 Another study, this one conducted in 1962 Donald W. MacKinnon, “Intellect and Motive in Scientific Inventors: Implications for Supply,” in Simon Kuznets, ed., The Rate and Direction of Inventive Activity: Economic and Social Factors (Princeton: Princeton University Press, 1962).
11 the eighteenth-century Swiss mathematician Daniel Bernoulli Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk (New York: John Wiley & Sons, 1996).
12 “The more inventive an independent inventor is” MacKinnon, “Intellect and Motive in Scientific Inventors: Implications for Supply,” in Kuznets, ed., Rate and Direction of Inventive Activity.
13 “first scientific man to study the Newcomen engine” “Henry Beighton” in Oxford Dictionary of National Biography.
14 Leonhard Euler applied Usher, History of Mechanical Inventions.
15 His published table of results Jennifer Karns Alexander, The Mantra of Efficiency: From Waterwheel to Social Control (Baltimore: Johns Hopkins University Press, 2008).
16 The resulting experiment Pacey, Maze of Ingenuity.
17 His example showed a generation of other engineers Mokyr, “The Great Synergy,” quoting Cardwell, 1994.
18 “In comparing different experiments” Pacey, Maze of Ingenuity.
19 As far back as the 1960s Dean Keith Simonton, “Creativity as Blind Variation and Selective Retention: Is the Creative Process Darwinian?”

The gross domestic product (GDP) was created in the 1930s to measure the value of the sum total of economic goods and services generated over a single year. The problem with the index is that it counts negative as well as positive economic activity. If a country invests large sums of money in armaments, builds prisons, expands police security, and has to clean up polluted environments and the like, it’s included in the GDP.
Simon Kuznets, an American who invented the GDP measurement tool, pointed out early on that “[t]he welfare of a nation can . . . scarcely be inferred from a measurement of national income.”28 Later in life, Kuznets became even more emphatic about the drawbacks of relying on the GDP as a gauge of economic prosperity. He warned that “[d]istinctions must be kept in mind between quantity and quality of growth . . . .

Even the natural sciences came under attack, not only because of the potential or actual damage caused by technology, but because their validity as modes of understanding the world was questioned.
This was perhaps least marked in economics, where Marxists had always been peripheral, though among the first ten Nobel laureates in this field there were three who were formed or partly formed in the early years of the Soviet Union or who were still active there (Wassily Leontief, Simon Kuznets, Leonid Kantorovitch). However, from 1974, when Friedrich von Hayek received the prize, still balanced by his ideological opposite, the Swede Gunnar Myrdal, and 1976, when it was given to Milton Friedman, it became markedly identified with a sharp turn away from Keynesian and other interventionist theories and a return to an increasingly uncompromising laissez-faire. Cracks in this prevailing consensus did not begin to appear until the late l990s.

Until the past few decades, the received wisdom among economists was that income inequality would be fairly low in the preindustrial era—overall wealth and productivity were fairly small, so there wasn’t that much for an elite to capture—then spike during industrialization, as the industrialists and industrial workers outstripped farmers (think of China today). Finally, in fully industrialized or postindustrial societies, income inequality would again decrease as education became more widespread and the state played a bigger, more redistributive role.
This view of the relationship between economic development and income inequality was first and most clearly articulated by Simon Kuznets, a Belarusian-born immigrant to the United States. Kuznets illustrated his theory with one of the most famous graphs in economics—the Kuznets curve, an upside-down U that traces the movement of society as its economy becomes more sophisticated and productive, from low inequality, to high inequality, and back down to low inequality.
Writing in the early years of the industrial revolution, and without the benefit of Kuznets’s data and statistical analysis, Alexis de Tocqueville came up with a similar prediction: “If one looks closely at what has happened to the world since the beginning of society, it is easy to see that equality is prevalent only at the historical poles of civilization.

If anything, it can be counterproductive by drawing our attention to short-term fixes rather than to long-term foundations.
55.The Internet has amplified both our penchant for catchy fake quotations and our ability to verify actual sources. Variations of this quotation are often attributed to Albert Einstein, but thanks to O’Toole (2010), I was able to trace its true source to sociologist William Bruce Cameron (1963), p. 13.
56.The United States grew to be a major economic power well before we were able to measure GDP. In the 1930s, the economist Simon Kuznets architected the first system of national income accounts. Since then, GDP has taken on a life of its own in exactly the ways that Kuznets cautioned against. A good account of his warnings and our failure to take them into account is offered by Rowe (2008).
57.Rankism – the root of all forms of discrimination and abuse of power – is nicely defined and demolished by Robert W. Fuller (2004).
58.Quoted in Fisher (1988).

The first issue, growing inequalities, is of particular concern for health inequalities; the second, a preponderance of inherited wealth, is of concern for society as a whole, not only for health. I want to start with Piketty’s concern over the way wealth is being accumulated. The bulk of the chapter will then deal with health inequalities.
Piketty’s central point is that the return on capital is higher than the growth of income. Therefore capital accumulates. Prior to Piketty’s painstaking collection and analysis of data, economists were not so concerned with distribution. Simon Kuznets, a distinguished US economist, observed that in the US and some other countries, as their economies developed and grew, up t0 the mid-twentieth century, inequality diminished. Inequality was just a stage of development, no need to worry about it, no politics involved.
Piketty, drawing on detailed study of the data over a longer period of time, points out that the period Kuznets was observing, roughly 1914–70, was an aberration.

And then there are the employees of sandwich bars and the London Transport staff who enable city folk to get to work. A reasonable guess might be that between 100,000 and 150,000 people in Britain are finance professionals dealing in wholesale markets (what might generally be described as ‘the City’) and that two to three times that number support them.
The principles of national income accounting were set out around the time of the Second World War by a group of economists – notably Simon Kuznets, James Meade and Richard Stone – and these principles are the standard means of measuring the economic contribution of a commercial activity. We assess the car industry by its added value: the difference between the selling price of the car and the cost of the steel, rubber and other materials that went into it. That added value is the sum of the earnings of the people who build the car and the operating profit (before financing costs) of the business.

Their value as innovators—or the value they had created for so many urban dwellers—was not part of the equation.
The less people spend on killing roaches, the worse it is for the economy by corporate and government measures. The universal metric of our economy’s health is the GDP, a tool devised by the National Bureau of Economic Research to help the Hoover administration navigate out of the Great Depression. Even the economist charged with developing the metric, Simon Kuznets, saw the limitations of the policy tool he had created, and spoke to Congress quite candidly of the many dimensions of the economy left out of his crude measure. Burning less gas, eating at home, enjoying neighbors, playing cards, and walking to work all subtract from the GDP, at least in the short term. Cancer, divorce, attention-deficit/hyperactivity disorder diagnoses, and obesity all contribute to GDP.

In his 1952 study of late development, Alexander Gerschenkron describes the “approximate sixfold increase in the volume of industrial output” as “the greatest and the longest [spurt of industrialization] in the history of the country’s industrial development,” though this “great industrial transformation engineered by the Soviet government” had “a remote, if any” relation to “Marxian ideology, or any socialist ideology for that matter”; and was, of course, carried out at extraordinary human cost. In his studies 10 years later of long-term trends in economic development, Simon Kuznets listed Russia among the countries with the highest rate of growth of per capita product, along with Japan and Sweden, with the US—having started from a far higher peak—in the middle range over a century, slightly above England.3
The ultranationalist threat was greatly enhanced after Russia’s leading role in defeating Hider left it in control of Eastern and parts of Central Europe, separating these regions too from the domains of Western control.

Economist Branko Milanovic explores these and other ideas about inequality in developing countries in his terrific book The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality.21
Inequality Within Countries
Most people have a strong presumption that inequality within countries worsens as economic growth proceeds, and—possibly—gets better at higher income levels. Much of the early research on development, especially the work of Simon Kuznets and Sir Arthur Lewis in the 1950s, suggested that would be the case. Stylistically, everyone starts out poor but equal; then some people begin to earn higher incomes, creating a widening income gap; and then over time others catch up and partially close the gap. But extensive research shows that, over the past several decades, this pattern has not held. It is true that within some countries, inequality has gotten worse—such as in China—but inequality has improved in others—such as in Brazil.

Some world leaders still tend to dismiss vices like inequality, and the corruption that often feeds it, as timeless and inevitable sins that are common to all countries, particularly poor ones in the chaotic early stages of development. But this is a cop-out. Developing societies do tend to be more unequal than rich ones, but it is increasingly unclear that their inequality problem will naturally disappear.
The belief that inequality fades over time had been the working assumption since the 1950s, when the economist Simon Kuznets pointed out that countries tend to grow more unequal in the early stages of development, as some poor farmers move to better-paying factory jobs in the cities, and less unequal in the later stages, as the urban middle class grows. Today, however, inequality appears to be rising at all stages of development: in poor, middle-class, and rich countries. One reason for the widening threat of inequality is that the period of intense globalization before 2008 tended to depress blue-collar wages.

According to Galbraith’s biographer Richard Parker, “Currie realized how woefully understaffed the Keynesian camp was in the administration compared to the trust-busting and national-planning camps. Serious recruitment and careful placement of sympathetic allies in key Washington offices became an imperative.”42 Inspired by a common creed, the young Keynesians sought each other out in the corridors of power and began meeting at the National Planning Association, set up in 1934.
Keynesian ideas also took root in America thanks to the work of econometricians and statisticians like Simon Kuznets, professor of economics and statistics at the University of Pennsylvania, and his followers at the National Bureau of Economic Research and the U.S. Department of Commerce, whose work logging the workings of the economy warranted Kuznets an honorable mention in The General Theory. Although Kuznets never became a Keynesian, his pioneering work on compiling statistics about national income and gross national product were called in evidence to fuel Keynes’s argument that bolstering aggregate demand would boost economic growth.

The second problem was practical: how could a person, or government, empirically measure happiness? The first class of problems have kept philosophers happy, if no one else, for a good 200 years. But without an answer to the second question – measurement – the whole debate had to be left to philosophers in their armchairs.
Measuring well-being: from GDP to SWB (subjective well-being)
In 1937, Simon Kuznets presented the report National Income, 1929– 35 to the US Congress, which contained the initial idea of a single measure of economic progress. This measure became known as Gross Domestic Product (GDP), and was designed to capture the economic activity of an entire country. Since the Second World War, GDP has been used to measure and compare countries’ economic growth, but has also been used as a proxy for how well off the country’s citizens are.

Its report is available as Jean-Paul Fitoussi, Amartya Sen, and Joseph E. Stiglitz, Mismeasuring Our Lives: Why GDP Doesn’t Add Up (New York: New Press, 2010), and available at http://www.stiglitz-sen-fitoussi.fr/en/index.htm. (Translations are available in Chinese, Korean, Italian, and other languages.)
75. This point was made right at the start, by the early developer of the national income accounts, Simon Kuznets, who noted that “the welfare of a nation can scarcely be inferred from a measure of national income.” Kuznets, “National Income, 1929–1932,” 73rd U.S. Cong., 2d sess., 1934, Senate doc. no. 124, p. 7.
Chapter Seven JUSTICE FOR ALL?
HOW INEQUALITY IS ERODING THE RULE OF LAW
1. There are many instances where laws can be seen as preserving inequities. The laws that protected and preserved slavery offer the most profound example.

He helped develop the nation’s tax withholding system, which made possible the rapid growth of government that he ultimately deplored. There is no greater irony in American economic history. He later said his experience in government reinforced his doubts about its efficiency.
Friedman received his Ph.D. from Columbia in 1945. His doctoral thesis already contained conservative claims. Written with the future Nobelist Simon Kuznets, it was titled “Income from Independent Professional Practice,” and argued that state limitations on the number of entrants, even if the desire is to maintain a high standard, into professions like medicine, dentistry, and law raised fees artificially and reduced the accessibility of the professional services. With his degree at last in hand, Friedman sought a teaching position at a good university.

It does not, however, distinguish between economic activity that actually improves the quality of life of the society and negative economic activity that takes away from it. Every type of economic activity is calculated in the GDP, including the building of more prisons, enlarging the police force, military spending, spending for cleaning up pollution, increased health-care costs resulting from cigarette smoking, alcohol, and obesity, as well as the advertising spent to convince people to smoke and drink more or eat processed and fatty fast food.
Simon Kuznets, the man who invented GDP, warned in his first report to the U.S. Congress in 1934 that “[t]he welfare of a nation can . . . scarcely be inferred from a measurement of national income.”38 Thirty years later Kuznets addressed the subject of GDP’s inherent limitations even more strongly writing that “[d]istinctions must be kept in mind between quantity and quality of growth. . . . Goals for ‘more’ growth should specify more growth of what and for what.”39
A number of attempts have been made over the years to come up with a suitable alternative to GDP.